How to make a million

A million bucks. That’s how much money I’m going to have when I retire—at the very least. How am I going to do it? Not by flipping real estate, not by playing the lottery and no, not by responding to one of those “Make big $$$ at home” ads. I’m going to do it the old-fashioned way, by saving a small portion of my salary each year and investing it well over a long period of time. It’s true that it will take me 28 years to make my million, but in my view there’s no easier way to get rich.

To make your own million, it’s better if you start young. If you have 30 years before you retire, you’re very lucky. You may not be flush with cash, but you’re rich in time. All you have to do is save about 10% of your salary each year, invest it automatically in a low-cost portfolio that’s heavy in stocks, and wait.

I started by saving $300 a month when I was 32, but you could start later if you’re willing to save more. I opened a discount brokerage RRSP account at my bank and chose a couple of low-cost balanced mutual funds to invest in. I set up an automatic transfer from my chequing account, so that twice a month when my paycheque was deposited, $150 was immediately whisked away and invested.

Then I surfed over to the online Vancity savings calculator to see how I was doing. (Go to www.vancity.com, click on “my money”, then “tools & calculators”, then “online calculators”, then “savings calculator”.) I entered my facts: I had 33 years to go until I retired at 65, I was saving $300 a month, and I hoped for a 7% return. The savings calculator told me I was on my way to a nest egg of $440,000.

That’s quite a bit short of a million, but I had done the hardest part: I had started. To make my million, all I had to do next was gradually increase the amount I saved each month as I made more money. It’s easy to increase the amount you save when you get a raise, because even after bumping up your savings, you still have more left over to spend than you did before. Now I have only 28 years left until I retire, but I’ve increased the amount I save every month so I’m on track to make my million.

The most difficult period is up until you reach the double-your-salary mark. Before that point, most of your growth comes from your deposits, so your portfolio sometimes seems to be treading water. However, once you have double your salary in your portfolio, you’ll be delighted to find that most of your growth is produced quickly and easily by the magic of compounding.

For instance, if you were making $75,000, your double-your-salary mark would be $150,000. If you had that much in your portfolio and you were saving 10% of your salary each year, in one year your savings would grow by $18,200 (assuming a 7% return). Of that growth, $7,500 would be due to your contributions and a full $10,700 would be from investment growth. If you reach that point by your early 40s, you’re well on your way to becoming a millionaire.

Getting an investment return of 7% a year is tough, but it’s certainly not impossible. I recommend investing in a portfolio that’s at least 60% stocks, because stocks have beat every other type of investment over the long run. Yes, real estate has been on fire lately, but it has its cold periods, too. Toronto, for instance, has seen average home price increases of only 2.4% a year after inflation since 1980, even with the recent run-up.

If you invest in the markets, you should invest in an RRSP to reduce the drag from taxes, and choose a low-cost portfolio to reduce the drag from fees. I recommend our Classic Couch Potato Portfolio, which has the lowest fees going, and has produced an average annual return of 11.8% since 1976. Or you could go with a low-cost balanced mutual fund. Find out more  about the Couch Potato and check out our latest mutual fund ranking.

The longer you save, the easier it gets, because it’s near the end that your money really balloons. In the last few years, your portfolio will be rocketing up by more than $70,000 a year.

Since my saving is on autopilot, I rarely even think about it. But if my resolve ever falters, I just go back to that Vancity calculator to check in on my plan. So far, it’s doing just fine. In fact I’ll be able to finish paying off some debt this year, so I’ll have an extra $250 a month to play with. I could easily spend the cash, but the calculator tells me that saving it might be worthwhile. If I do, I’ll retire with $1.3 million.